How does the NHS pension work? A comprehensive guide

The NHS Pension Scheme is a 'defined benefit' scheme based on your career average earnings. Each year, you and your employer contribute a percentage of your salary, and in return, you build up a guaranteed, inflation-proofed pension for life, which isn't affected by stock market performance.

What type of pension is it?

The NHS offers a 'defined benefit' (DB) pension. This is often described as a gold-standard pension because it provides you with a secure, predictable income in retirement. The amount you get is based on a set formula, using your salary and length of service.

This is very different from the 'defined contribution' (DC) pensions common in the private sector. In a DC scheme, you and your employer pay into an investment pot. The final value of your pension depends entirely on how well those investments perform. With the NHS scheme, the risk lies with the scheme, not with you.

Since 2015, all new members join the 2015 Scheme, which is a specific type of DB pension called a 'Career Average Revalued Earnings' or CARE scheme. This means your pension is based on your average earnings across your whole career in the scheme, rather than just your final salary.

How much do I contribute?

Your contribution is a percentage of your pensionable pay, taken automatically from your salary before tax. This means you get tax relief on your payments, which reduces your overall tax bill. The percentage you pay depends on how much you earn.

The contribution rates are tiered. Here are the rates from 1 April 2025:

It’s important to know that if you work part-time, your contribution rate is based on your actual annual earnings, not the full-time equivalent. This ensures part-time staff are not pushed into a higher contribution tier unfairly.

While you are contributing, your employer makes a much larger contribution on your behalf. This is currently 23.7% of your pensionable pay. This is a significant part of your total NHS remuneration package and highlights the immense value of being in the scheme. You can see how pension contributions affect your monthly income using an NHS take-home pay calculator.

How your pension is calculated: A CARE example

The 2015 Scheme is a Career Average Revalued Earnings (CARE) scheme. It might sound complex, but the principle is straightforward. Each year, you 'bank' a slice of pension that you will receive every year in retirement. Here’s how it works:

• Accrual Rate: The amount you bank each year is equal to 1/54th of your pensionable earnings for that year.
• Revaluation: At the start of each new scheme year (1 April), the total pension you have banked so far is increased. This increase is linked to inflation (the Consumer Prices Index, or CPI) plus an extra 1.5%. This is a crucial feature that protects your pension's value from being eroded by inflation while you are still an active member.

A worked example

Let's imagine a newly qualified physiotherapist starting a Band 5 role. In their first year, their pensionable pay is £29,000.

Year 1:

• They build up a pension of: £29,000 ÷ 54 = £537.04 per year.
• This means they have secured an annual income of £537.04 for every year of their retirement, based on just one year of work.

Year 2:

• Let's assume inflation (CPI) is 2%. The pension they banked in Year 1 is 'revalued' by CPI + 1.5%, which is 3.5%.
• The £537.04 becomes: £537.04 x 1.035 = £555.84.
• In Year 2, they get a small pay rise and their pensionable pay is now £30,000.
• They bank a new slice of pension: £30,000 ÷ 54 = £555.56 per year.
• Their total annual pension after two years is the sum of the revalued amount from Year 1 and the new amount from Year 2: £555.84 + £555.56 = £1,111.40 per year in retirement.

This process repeats every year you are in the scheme. Over a long career, these revalued slices add up to form your total annual pension.

What about the older 1995 and 2008 sections?

Before the 2015 Scheme, there were two older sections. Many long-serving staff will have built up benefits in one of these. Even though everyone now builds up pension in the 2015 Scheme, any pension you earned in these older sections is protected and calculated under its original rules.

• The 1995 Section: This is a final salary scheme with a Normal Pension Age of 60. Your pension is based on 1/80th of your final salary for each year of service. It also includes an automatic tax-free lump sum of three times your annual pension.
• The 2008 Section: This is also a final salary scheme, but with a Normal Pension Age of 65. The accrual rate is faster at 1/60th of your final salary for each year of service. There is no automatic lump sum, but you can choose to give up part of your annual pension in exchange for a tax-free cash lump sum.

If you have benefits in these sections, they will be paid at their respective Normal Pension Age (60 or 65), while your 2015 Scheme benefits will be paid at your State Pension age. You can choose to take them all at the same time, but reductions may apply for early payment.

The McCloud Remedy explained

You may have heard about the 'McCloud remedy' or the 'Age Discrimination Remedy'. This relates to the way staff were moved from the old schemes to the 2015 Scheme.

In short, courts found that protecting older staff by allowing them to stay in the 1995 or 2008 schemes for longer was discriminatory to younger members. The remedy fixes this.

It affects members who were in the scheme on or before 31 March 2012 and still had service on or after 1 April 2015. For the 'remedy period' (1 April 2015 to 31 March 2022), eligible members will get to choose which scheme rules they want their service to be calculated under: their old 'legacy' scheme (1995/2008) or the 2015 Scheme.

This is called the 'Deferred Choice Underpin'. You don't need to do anything now. When you retire, you will be provided with figures for both options and can choose the one that is better for you. For most people, this means they will simply receive a higher pension.

Other valuable benefits

The NHS Pension is more than just an income in retirement. It comes with a package of other valuable benefits for you and your family.

• Ill-Health Retirement: If you become too ill to work, you may be able to retire early and take your pension. Depending on the circumstances, your pension could be enhanced, meaning you get more than you have built up so far.
• Life Assurance: If you die while you are an active member of the scheme, a lump sum of two times your actual annual pay is paid to your nominated person(s). This is a significant benefit that provides financial protection for your loved ones.
• Survivor Pensions: A pension can be paid to a surviving spouse, civil partner, or nominated qualifying partner, as well as to dependent children.
• Flexibility: The scheme offers options to take your pension from age 55 (with a reduction), take a portion of your pension and continue working (partial retirement), or even boost your pension by buying Additional Pension.

Key takeaways

• The NHS Pension is a valuable defined benefit (CARE) scheme, giving you a secure income for life in retirement.
• You and your employer both contribute, and you receive tax relief on your payments. The employer contribution is very generous.
• Each year, you build up a pension worth 1/54th of your earnings. This pot is then increased each year by inflation (CPI) + 1.5% while you're an active member.
• The pension age for the 2015 Scheme is your State Pension age, but you can take it earlier with a reduction.
• The scheme includes excellent extra benefits, including life assurance and pensions for your dependents.
• If you were in the scheme before 2012, the McCloud remedy gives you a choice at retirement for your benefits between 2015 and 2022.
• You can track your pension by checking your Annual Benefit Statement or your Total Reward Statement.